About an hour's drive south of San Francisco lies Silicon Valley, probably the most influential suburb in the world. Powered by a bunch of law firms that many of you never will have heard of, it is fast becoming the legal centre of the universe. In the Valley, it is the lawyers who rule the roost – companies can rise or fall according to whether they have convinced the right team to represent them, as it is often lawyers that introduce start-ups to venture capitalists. This is where the assistant salary wars that shaped last year began, and where law firms first thought of taking equity in lieu of fees.
Greg Gallo, the corporate rainmaker at Gray Cary Ware & Friedenrich, says: "Silicon Valley is a supplier of capital goods to the rest of the world's economy. The US economy has for a long time been the driver of the world economy, and the rest of the world hasn't quite picked up the pace." And the fact that some of the globe's most influential companies are being born and bred in the Valley leads, he says, to a style of lawyering unique to Valley firms. "The good Silicon Valley law firms are very selfless, very deal-orientated and have no egos," he says. "It's not about us, it's about our clients. In New York, lawyering is about sport – they have a love affair with a transaction, while we have a love affair with the company."
Last year, the Valley's top 10 law firms recorded a combined revenue of $3bn (£2bn), which was higher than the much more international but similarly-sized magic circle's revenue in 1999-2000. So who are these firms, and who are the lawyers that are going to shape legal practice for the new millennium?
The name synonymous with Silicon Valley is undoubtedly Wilson Sonsini Goodrich & Rosati which, though yet to venture outside the US, has made an international footprint on technology work. Led by the infamous Larry Sonsini, the firm outstrips rivals on initial public offering (IPO) work for both underwriters and issuers.
But to think it is the only Valley firm stealing a march on the rest of the world would be a mistake. Other firms include Cooley Godward, Gray Cary, Fenwick & West, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian and Venture Law Group (VLG).
The latter two are the new kids on the block. Gunderson Dettmer opened in 1995 when lead partner Bob Gunderson jumped ship from Brobeck Phleger & Harrison to set up a start-up firm. He was following in the footsteps of Craig Johnson, the true innovator of the Valley, who was number two at Wilson Sonsini before he left to set up VLG in 1993. VLG does only start-up work (once companies have floated the firm is no longer interested), and it only does that if it gets a slice of the equity.
These are the names you need to know – the names that drive the Valley and the names that power equity issues in the US.
San Francisco is just a stone's throw away, and home to those other two Bay Area giants, Brobeck Phleger and Morrison & Foerster (MoFo). Brobeck Phleger is the name on the tip of everyone's tongue when you mention the Valley, largely because of its international visibility. The firm has a European joint venture with Boston technology firm Hale and Dorr, dubbed Brobeck Hale and Dorr, which scoops up plenty of international high-tech work, with offices in London, Oxford and Munich.
But although 90 per cent of the firm's clients are technology based, and despite having 170 lawyers in the Valley acting for names such as Cisco Systems, Intel and Broadcom, it is not regarded locally as a true member of the Valley community. MoFo, branding itself as the next Brobeck Phleger but in reality probably less focused, suffers the same image problem.
Then come the outsiders in the form of Los Angeles firms such as Latham & Watkins and Gibson Dunn & Crutcher, and below them in the pecking order you will find New York firms such as Shearman & Sterling, Skadden Arps Slate Meagher & Flom, Simpson Thacher & Bartlett and Davis Polk & Wardwell, to name but a few.
Of these, Lathams has undoubtedly been the most successful at picking up local talent and making a name for itself as a good Valley player. Unlike the New York firms, which have tended to shy away from start-up work in favour of investment banking and transactional clients, it has gone for an all-out attack.
Managing partner of the Lathams office Pete Kerman says: "On the transactional side, what we've been focusing on is being in a place where you can find lawyers who can take you from a cold start to a hostile transaction. You can come here for having your start-up done and for having your venture fund represented, and we're the only firm with that breadth of strategy."
As a West Coast firm, Lathams has been welcomed into the Valley and has made impressive lateral hires from the likes of Wilson Sonsini, VLG and most recently Cooley Godward. Alan Mendelson joined from Cooley Godward last summer, and brought with him a large biotech start-up practice. "[My practice] was highly committed to the emerging company space – the start-ups – and yet even in my own practice, once the companies got to a reasonable level of maturity I'd find myself losing relationships because that firm wasn't geared up," says Mendelson.
New York firms have not done as well as Lathams at breaking into Valley work, even though they are all still doing quite nicely, thank you very much.
Shearmans had the toughest start. It was the first New York firm to open on the West Coast in 1979 when it moved into San Francisco, and then in 1998 it opened a branch office in the Valley. Since then there have been some significant partner departures – most recently the move by Bill Hinman and Kevin Kennedy to Valley newcomer Simpson Thacher.
Last summer Shearmans drafted in new management – bringing in the co-head of the international M&A practice Peter Lyons and Bruce Czachor from Toronto to run the practice. Sources say that the office had suffered a lack of commitment from New York, but Czachor says the weight of the firm is now behind them. "A lot of people in the local firms are questioning the model and want to be global," says Czachor. "We represent Siemens and British Telecom – that's the kind of high-end work we can get.
"When the market was hot, the investment banks couldn't find enough lawyers to do the work, and that's part of the reason we expanded out here. A lot of our relationships are with the investment bank underwriters; local firms prefer to represent the companies and get equity – we want to do both."
The office is doing M&A work, capital markets, intellectual property (IP), litigation and start-up work, much of it generated by European and Asian clients. Investment banking clients include Goldman Sachs, Credit Suisse First Boston and Merrill Lynch.
Weil Gotshal & Manges has taken an altogether different approach to Silicon Valley, focusing on IP protection. Managing partner Matthew Powers has built up an impressive practice, acting for the likes of Cisco, Intel and Applied Materials, and the office regularly comes first or second in the firm's profitability rankings.
The New York firms, however, will always be viewed as outsiders by the Valley elite.
Brobeck Phleger managing partner Tower Snow says: "The New York firms thought they'd be able to sweep away all the companies from the Californian firms; they thought that when the companies got big they'd graduate to them. What they failed to take into account was personal loyalties – our clients are very loyal and they're not going to leave us. We've done over 50 major M&A transactions for Cisco over the last two years, and no New York firm has ever been retained by Cisco [for transactional work]. I'm not aware of any of our clients ever going to a New York firm."
MoFo partner Paul Lion says: "Things that lawyers fight about or challenge in New York, people don't worry about here. There's more collaboration. New York firms represent venture capitalists as if they're lenders, as if they're banks. But banks aren't in partnerships – investors and founders want to create long-term relationships here."
But with the market downturn, which has seen the number of IPOs drop dramatically since April, some of the New York firms could start to question their investments. Czachor says: "With the market where it is at the moment, every firm is going to ask, 'Should we continue to expand?'"
But M&A work is still flooding the Valley, so both the local firms and newcomers are reporting plenty of work. After all, the profit figures for last year showed massive increases for the Bay Area firms despite the IPO market collapsing in April.
Gallo at Gray Cary says: "At the moment, the whole US economy is doing one IPO a week, whereas it used to be 10 and some weeks even more – sometimes 15. A lot of our clients who are venture-backed will need to consolidate, and I expect  will be a boom year for M&A, some of it resisted. People who do corporate securities may not be busy, but the litigators will be."
The downturn has other advantages too. When the markets were hot, assistants were leaving in their droves to join dotcoms and bag massive equity stakes. Now they are coming back with their tails between their legs, and retention is not nearly as big an issue as it was. "Somebody left us last year as an associate for a start-up," Snow says. "He signed all the documents for his equity, and before he'd even done a day's work the markets went up and he'd made $51m (£34.6) from the equity. It's not like that now – our attrition is down now by 50 per cent."
The change has left a lot of practices overleveraged because they had already hired associates in numbers that accounted for the same amount of attrition as the year before. On average, M&A departments in the Valley are leveraged at about 3:1, with emerging companies' groups slightly higher.
But while the battle for the assistants has quietened down, the venture capitalists are as hungry as ever for top partners. Wilson Sonsini has seen a wave of partner departures – 15 in the last year – and most recently lost corporate rainmaker Judith O'Brien, who went off to co-found a venture capital firm. Brobeck Phleger just lost Cisco relationship partner Therese Mrozek, one of the firm's biggest names, to venture capital firm Weston Presidio Capital (The Lawyer, 22 January).
VLG chairman Craig Johnson says: "We do have a lot of competition for our key people from venture capitalists, and a lot of key people have left. The economic incentives are in a very different league – many of the people, at least on paper, are making $50m (£33.9m) a year. I think we just have to accept it as part of our success. Our attorneys do much the same kind of job as venture capitalists because the skill sets are so similar."
The Valley firms have no problems hiring, though. While the brakes may have been put on supplementary associate hiring, high salaries and massive opportunities mean top law school graduates are now often heading for the Valley in preference to New York, so there is no shortage of options.
Valley firms have never gone for huge practices, preferring to turn work away when necessary. They have the luxury of being able to be fussy about what they take on, and clients pitch to them to be represented. Lion at MoFo says: "The best client is the emerging growth technology company that is venture capital-backed and has IPO as its exit strategy rather than being acquired. And venture fund formations – you represent these funds in their investments in portfolio companies and then they refer you to portfolio companies."
Johnson at VLG adds: "We've had the opportunity to do work for Cisco, Microsoft, Intel and Oracle. I bet we're one of the few corporate securities firms in the world that would say no to that. We'd rather have more fun working with early stage companies – and it's much more lucrative."
Sources say many investment banking clients are having huge difficulty getting representation in the Valley and getting the attention they think they deserve, but since the downturn, the choices are not so difficult, and fewer potential clients are being turned away.
Fenwick & West IP litigation partner Charles Stern says: "It's still busy, but it's not nuts like it was last spring. At the height of it we were turning away four out of four companies. We were in a position to be a lot more picky then."
But being in such a crazy marketplace is not always an advantage. Real estate prices have rocketed in the Valley to such an extent that it is now one of the most expensive places to do business in the world.
Stern says: "Real estate prices have become very high; everyone wants to be here and it's driven the prices up. Firms have opened offices outside, generating clients here and staffing them out of branch offices. A lot of firms previously thought of as powerhouse boutiques have really gone."
VLG is the latest example. It is planning to open an office in San Francisco and move five of its 23 partners out there after discovering additional space in the Valley would cost a daunting $200 (£140) per square foot.
So while a sceptic might say that the end of Silicon Valley as we know it could be in sight, it remains for the time being the place where companies are born. Valley firms are not really interested in the mega corporate clients, they prefer the lucrative start-up work. So maybe this means there is a little corner of Silicon Valley with your law firm's name on it. Osborne Westphalen, Osborne Clarke's European alliance, certainly thinks so, and at the moment it is the only pan-European law firm on offer out there.
Valley lawyers are waiting to see who will be next. n
•In next week's feature, Claire Smith meets Larry Sonsini and Craig Johnson.